4 ms·

This is obviously a valid criticism. But it would be far more valid to criticize any alternative valuation that fixed the problem you're addressing. For exampl

This is obviously a valid criticism. But it would be far more valid to criticize any alternative valuation that fixed the problem you're addressing. For example, it would be conservative to value all of YC's startups in terms of their cash and receivables, plus the liquidation value of their furniture and servers. But then it would be trivial to say "Hey! AirBNB isn't an asset play. It's valued based on growth. The asset value is a worst-case scenario, but most of the other scenarios involve a lot of revenue growth and free cash flow." Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? (i.e. anything you think would produce a "fair" market price?) Actually, more directly: how much of your net worth would you invest in shorting YC's portfolio at this inflated $4.7bn valuation?

redthrowaway 15y ago
>Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? No, there isn't. Angel investing is an inherently speculative game. What I would say is this: a YC investor could reasonably claim to have seen a return on any shares he sold, or any shares he holds of a company that has gone public. That's it. Beyond that, all investments are good only in theory. Were I to buy a house, I would decide what was affordable based on the former, not the latter. The same is true for my contributions to my children's college fund or my retirement fund. In short, all of the things that actually matter in life would be based off of what I had sold and what shares I held of public companies. To make any long term financial decisions based on the projected worth of companies that had, at best, gone through a successful series A or B would be foolish. They're nice numbers to think about, but they don't mean a damned thing until they're putting food in my kids' mouths. Let's illustrate my point like this: Suppose you are given the chance to pay 1MM for some good that has a 20% chance of being worth 1BB in 5 years. If you can spare the million, then this is a fantastic investment by any measure. Having bought into this investment, however, how would you describe your net worth? Your investment is valued at 1BB. The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. Still, that 200MM is fairy money. It doesn't exist, and you can't do a damned thing with it until you somehow manage to convince someone to give it to you. To claim that you're "worth" 200MM is silly, as you can't spend a dime of it. This is the problem I have with pg's numbers: They sound great until you ask what the cash-out is. Saying "I've invested in companies that are worth 4.7BB" is great, but it doesn't say anything useful about how well your money has been used. Remember, prior to investment it was real money that could buy apples and tuitions. Now it's theoretical money that could buy a whole lot of apples, but only under a specific set of favorable circumstances. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?
- byrneseyeview 15y ago
  The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. A market price is a price at which someone with good information is indifferent between going long and short. If you're applying some discount to the $200mm based on the possibility of a $0 outcome, you'd have to put your money where your mouth is and sell short at that level. If you'd made $200mm through some other means, and bought that 20% chance for a billion dollars at the market rate, would you treat that as a loss? At what market value would buying that constitute a good deal? The whole reason we have valuation is to answer questions like that. The question of "What is this worth?" is very different from the question "How much cash can I extract from this now? "What is this worth?" means "What is the net present value of all the cash I can extract from this asset, assuming I extract at the optimal time?" It's the difference between the value of a couple scraps of gold in a creek and the value of a massive gold mine. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out? That's not the point, though. Startups are illiquid, so it doesn't make sense to sell. Plus, the YC people just don't seem to need that much money. Some people get rich in order to buy jets and vacation homes--the impression I get is that the YCers got rich enough to spend their time working on cool stuff, e.g. YC.

redthrowaway 15y ago

>Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? No, there isn't. Angel investing is an inherently speculative game. What I would say is this: a YC investor could reasonably claim to have seen a return on any shares he sold, or any shares he holds of a company that has gone public. That's it. Beyond that, all investments are good only in theory. Were I to buy a house, I would decide what was affordable based on the former, not the latter. The same is true for my contributions to my children's college fund or my retirement fund. In short, all of the things that actually matter in life would be based off of what I had sold and what shares I held of public companies. To make any long term financial decisions based on the projected worth of companies that had, at best, gone through a successful series A or B would be foolish. They're nice numbers to think about, but they don't mean a damned thing until they're putting food in my kids' mouths. Let's illustrate my point like this: Suppose you are given the chance to pay 1MM for some good that has a 20% chance of being worth 1BB in 5 years. If you can spare the million, then this is a fantastic investment by any measure. Having bought into this investment, however, how would you describe your net worth? Your investment is valued at 1BB. The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. Still, that 200MM is fairy money. It doesn't exist, and you can't do a damned thing with it until you somehow manage to convince someone to give it to you. To claim that you're "worth" 200MM is silly, as you can't spend a dime of it. This is the problem I have with pg's numbers: They sound great until you ask what the cash-out is. Saying "I've invested in companies that are worth 4.7BB" is great, but it doesn't say anything useful about how well your money has been used. Remember, prior to investment it was real money that could buy apples and tuitions. Now it's theoretical money that could buy a whole lot of apples, but only under a specific set of favorable circumstances. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?

byrneseyeview 15y ago
The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. A market price is a price at which someone with good information is indifferent between going long and short. If you're applying some discount to the $200mm based on the possibility of a $0 outcome, you'd have to put your money where your mouth is and sell short at that level. If you'd made $200mm through some other means, and bought that 20% chance for a billion dollars at the market rate, would you treat that as a loss? At what market value would buying that constitute a good deal? The whole reason we have valuation is to answer questions like that. The question of "What is this worth?" is very different from the question "How much cash can I extract from this now? "What is this worth?" means "What is the net present value of all the cash I can extract from this asset, assuming I extract at the optimal time?" It's the difference between the value of a couple scraps of gold in a creek and the value of a massive gold mine. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out? That's not the point, though. Startups are illiquid, so it doesn't make sense to sell. Plus, the YC people just don't seem to need that much money. Some people get rich in order to buy jets and vacation homes--the impression I get is that the YCers got rich enough to spend their time working on cool stuff, e.g. YC.